Correlation Between Lanka Milk and Tal Lanka

Can any of the company-specific risk be diversified away by investing in both Lanka Milk and Tal Lanka at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Lanka Milk and Tal Lanka into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Lanka Milk Foods and Tal Lanka Hotels, you can compare the effects of market volatilities on Lanka Milk and Tal Lanka and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Lanka Milk with a short position of Tal Lanka. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lanka Milk and Tal Lanka.

Diversification Opportunities for Lanka Milk and Tal Lanka

0.77

Correlation Coefficient

Lanka Milk  Tal Lanka

Poor diversification

The 3 months correlation between Lanka and Tal is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Lanka Milk Foods and Tal Lanka Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tal Lanka Hotels and Lanka Milk is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Lanka Milk Foods are associated (or correlated) with Tal Lanka. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tal Lanka Hotels has no effect on the direction of Lanka Milk i.e., Lanka Milk and Tal Lanka go up and down completely randomly.

Pair Corralation between Lanka Milk and Tal Lanka

Assuming the 90 days trading horizon Lanka Milk Foods is expected to generate 1.06 times more return on investment than Tal Lanka. However, Lanka Milk is 1.06 times more volatile than Tal Lanka Hotels. It trades about 0.32 of its potential returns per unit of risk. Tal Lanka Hotels is currently generating about 0.15 per unit of risk. If you would invest  2,930  in Lanka Milk Foods on October 24, 2024 and sell it today you would earn a total of  1,890  from holding Lanka Milk Foods or generate 64.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Lanka Milk Foods  vs.  Tal Lanka Hotels

Lanka Milk Foods

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lanka Milk Foods are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lanka Milk sustained solid returns over the last few months and may actually be approaching a breakup point.

Tal Lanka Hotels

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tal Lanka Hotels are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Tal Lanka sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lanka Milk and Tal Lanka

The main advantage of trading using opposite Lanka Milk and Tal Lanka positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lanka Milk position performs unexpectedly, Tal Lanka can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Tal Lanka will offset losses from the drop in Tal Lanka's long position.

The idea behind Lanka Milk Foods and Tal Lanka Hotels pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.